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Assets and expenses are two accounting terms that new business owners often confuse. Here’s what each term means and how to use them in accounting. Assets vs. Expenses: Understanding the Difference
The fundamental accounting equation, also called the balance sheet equation, is the foundation for the double-entry bookkeeping system and the cornerstone of accounting science. Like any equation, each side will always be equal. In the accounting equation, every transaction will have a debit and credit entry, and the total debits (left side ...
The accounting equation is a statement of equality between the debits and the credits. The rules of debit and credit depend on the nature of an account. For the purpose of the accounting equation approach, all the accounts are classified into the following five types: assets, capital, liabilities, revenues/incomes, or expenses/losses.
Technically, an expense is an event in which a proprietary stake is diminished or exhausted, or a liability is incurred. In terms of the accounting equation, expenses reduce owners' equity. The International Accounting Standards Board defines expenses as:
The general accounting equation is as follows: Assets = Equity + Liabilities, [22] A = E + L. The equation thus becomes A – L – E = 0 (zero). When the total debits equals the total credits for each account, then the equation balances. The extended accounting equation is as follows: Assets + Expenses = Equity/Capital + Liabilities + Income,
Similarly expenses during the financial period are recorded using the respective Expense accounts, which are also transferred to the revenue statement account. The net positive or negative balance (profit or loss) of the revenue statement account is transferred to reserves or capital account as the case may be.
A company can maintain one journal for all transactions, or keep several journals based on similar activity (e.g., sales, cash receipts, revenue, etc.), making transactions easier to summarize and reference later. For every debit journal entry recorded, there must be an equivalent credit journal entry to maintain a balanced accounting equation ...
To increase an expense account, it must be debited. [3] To decrease an expense account, it must be credited. [3] The normal expense account balance is a debit. [3] In order to understand why expenses are debited, it is relevant to note the accounting equation, Assets = Liabilities + Equity. [4]